Fitch warns South African banks over fallout from coronavirus pandemic

The coronavirus pandemic poses significant downside risks to the operating environment for South African banks, Fitch Ratings says in a new report.

South African banks will report weaker earnings in 2020, the ratings firm said.

Operating profit will be negatively affected by a rise in credit impairments and pressure on margins from lower interest rates (100bp cuts in March and April 2020 in response to coronavirus, and more could follow) and rising competition.

Profitability will also be affected by lower client activity, debt relief measures and subdued loan growth. Weaker results from regional operations are also likely, due to lower oil prices and the fallout of the pandemic, Fitch said.

“We expect the banks’ traditionally-resilient asset quality and earnings to be pressured in 2020 by the sharp decline in economic activity and widespread disruption to industries from measures to limit the spread of the virus,” it said.

Fitch recently downgraded five South African banks’ ratings to ‘BB’/Negative.

“The pandemic will compound existing threats to the banks’ operating environment and their financial profiles stemming from a prolonged period of poor economic growth, power supply shortages, weak business confidence, and deep social inequalities.

“We expect asset quality to deteriorate as households and corporates become stressed. South African companies are exposed to falling commodity prices, lower mining and manufacturing activity, disruption to global supply chains, declining tourism and falling global demand, as well as social containment measures,” the ratings firm said.

Banks will be affected by their exposure to households, SMEs and industry segments most affected by the pandemic. These include tourism, hospitality, retailers and manufacturers reliant on global supply chains, it said.

Fitch also warned that a prolonged crisis could eventually lead to widespread borrower defaults, noting that banks entered the crisis with adequate capitalisation, broadly commensurate with risk.

“We expect them to maintain moderate buffers over regulatory requirements despite weaker earnings and higher risk-weighted assets as credit risk rises. Capital rules are being relaxed and banks have scope to shore up their capital by cutting dividends.

“Nevertheless, a prolonged crisis leading to severe asset quality deterioration could put capitalisation under pressure.”

Fitch conceded that the relaxation of the liquidity coverage ratio requirement to 80% from 100%, introduced by the South African Reserve Bank in light of the pandemic, will provide temporary liquidity relief to banks.

The banks’ low reliance on foreign-currency funding (9% of total sector liabilities) limits their sensitivity to capital flows, exchange-rate risks and worsening of global funding conditions, it said.